International tax transparency: The need for automatic exchange of information

In recent years, the international tax environment has seen an increase in the global drive towards greater financial transparency and the automatic exchange of financial information, which replaces the earlier standard of information exchange on request.

The standard of exchanging information automatically calls
on jurisdictions to obtain information from financial institutions and to exchange
that information automatically with other jurisdictions on an annual basis to
detect, deter and discourage offshore tax abuses.

South Africa plays a leading role in the global movement
towards transparency and the exchange of information in tax matters to ensure
fairness in the international tax system and to prevent the erosion of the
international tax base. To this end, on 8 February 2013, the National Treasury
and the South African Revenue Service (SARS) announced that negotiations with
the United States of America's (USA) Department of the Treasury had commenced, with
the aim of entering into an inter-governmental agreement in respect of the
USA's Foreign Account Tax Compliance Act (FATCA).

By way of background, FATCA is a USA law, enacted in 2010 to
combat offshore tax evasion and to recoup much needed revenues. FATCA therefore
requires non-USA foreign financial institutions and non-USA non-financial
entities to identify and disclose their USA account holders and members or become
subject to a new 30% USA withholding tax.

Accordingly, once the inter-governmental agreement is signed
into law, the USA Treasury will view South African financial institutions, such
as custodial institutions, depository institutions, investment entities and
specified insurance companies (unless they present a low risk of being used for
evading tax), as being generally compliant with FATCA. Furthermore, once the
inter-governmental agreement takes effect, the relevant financial institutions
in South Africa will be required to obtain information on USA citizens and to
report such information to SARS, which will in turn exchange the information with
the USA in accordance with the relevant provisions of the double taxation
agreement entered into between South Africa and the USA.

To cater for the automatic exchange of specified information
by financial institutions, SARS has proposed a business requirement
specification (BRS) which will regulate the systematic and periodic transmission
of taxpayer information by the source country to the residence country.

To give effect to the requirement to provide information for
purposes of FATCA, SARS has published two draft public notices in terms of s26 and
s29 of the Tax Administration Act, No. 28 of 2011 (TAA), which requires a
return as specified in the BRS, and s30 of the TAA, which requires the record
keeping of this information. The closing date for comments to the draft public
notices is 6 June 2014.

Although there is a global drive and indeed a global need
for the automatic exchange of information, the onus of implementing such a reporting
structure lies not so much with the relevant revenue authority but rather with
the selected financial institutions as the financial institutions will have to
ensure that the mechanism of the reporting process is fully understood and
synchronised with its existing reporting requirements.

It will be interesting to see how financial institutions develop
the necessary systems and frameworks to facilitate its reporting obligations to
mitigate its reputational risk and risk of financial penalties.

WHY REGISTER WITH SAIT?

Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.